In the last 10 years significant changes have taken place in the payment systems of American businesses. The growth of electronic pre-paid products and stored value cards, both open and closed loop, have resulted in changing payment habits and business opportunities, new technologies, and new methods of distribution.
The market for prepaid and stored value cards continues to grow. Financial research firm, Mercator Advisory Group, estimates that $157 billion was loaded onto prepaid instruments in 2003. Of that, the largest segments were the gift card and government program card segments. Another prestigious financial consultant, The Pelorus Group, projects that the number of prepaid cards will top 34 million in 2005.
Traditionally, these magnetic-strip cards have been sold individually at retail to be activated at the time of purchase, at the point of purchase. The purchaser at the point of purchase places a monetary amount on the card through register activation. That is, the buyer adds value to a previously valueless piece of plastic, and transforms the card into a monetary instrument. By adding a cash value to these zero balance cards, the cardholder can purchase services or merchandise at a cost up to the gift cards value on either a closed or open looped basis.
In many cases, the prepaid card buyer will insert the activated gift card into a greeting card, and then into an envelope, in order to create a present that can be handed to or mailed to the intended recipient. The use of prepaid or stored value cards as gift items has sky rocketed over a comparatively short amount of time, affecting the sale and use of greeting cards specifically, and retailing, in general. The convenience and assured satisfaction of the recipient have factored greatly in the rise of gift cards.
The retailer benefits from this transaction because the consumer pays in advance of purchase to the seller of the gift card. No interest or guarantee of repayment is given, and the monetary value of the card can only be retrieved when the person in possession of the card makes a purchase from a specific retail brand in a closed loop situation, or almost any retailer in an open loop situation. Post-transaction, once the designated monetary value is reached, some cards may then be reloaded with additional funds.
In financial reality, consumers are, in essence, loaning large amounts of money, at no interest, to the issuing companies. Some of that advance payment may be lost to the cardholder since no change is given when the cardholders purchase amount is less than the amount designated on the card. Leftover monies are not generally of a large enough denomination to be used for additional purchases, and in many cases, are never retrieved. Generally speaking, there are no records being kept in relation to the amount bought, or by whom, or where nor the amount being spent, or by whom. Neither is there a report given to the possessor of the card about any balances that may be left.
Most issuers have recently stopped charging service fees or including expiration dates. Many are looking for additional ways to enhance the structure and delivery of gift cards because consumers continue to place more emphasis on prepaid shopping and more dollars on gift cards each year. While there are a variety of reasons for the rise in stored value and prepaid gift card the overwhelming reason for consumers is convenience.